How much does a Refund Anticipation Loan Cost?

Disclaimer: I last handled refund anticipation loans in 2005, which is my most current anecdotal evidence (I found some more recent stats on the web – hyperlinks are to citation, and although I believe them to be accurate, I have not verified the accuracy of the referenced sites, and make no claim about their accuracy). Things may have improved since then (but I doubt it). There are cases where the benefits to an individual taxpayer outweigh the costs, but their widespread popularity suggest to me that the full cost of these products isn’t being effectively communicated to most buyers.

Keep in mind that traditional refund anticipation loans aren’t even issued until the return is accepted and the IRS has sent back a debt indicator that there are no liens against the refund. While it’s not 0%, there’s not a whole lot of risk once these criteria are met that the refund won’t be forthcoming. My understanding is that one function of interest is to offset potential losses from default. Refund Anticipation loans are not particularly risky, yet annualized of the 1-2 weeks of the loan, interest rates can range from 40% to 235% (based on 2006 figures) – that’s not including tax preparation fees that the client may not have incurred if they didn’t have to go to a preparer to get the loan.

But wait, there’s more. One year while I was still handling these products, the IRS was pulling a significant number of earned income credit returns for further examination. Which is how we discovered that if the IRS didn’t send the refund within 3 weeks, the lender would begin charging additional interest, and, as my clients at the time reported, start calling them daily demanding that they repay the loan with their personal funds (remember, these are people who needed their refunds badly enough to purchase a very expensive loan, and they haven’t received anything from the IRS yet – the odds of them having any money were extremely slim, and there wasn’t a whole lot they could do to speed the IRS up – the daily phone calls were likely to accomplish nothing more than pile more pressure on an already burdened client – and they would not stop).

How much do these loans cost? Don’t answer yet. Unless you elect to have the proceeds direct deposited or credited on some chains “card,” you will receive a bank check, not an IRS check. Don’t plan on cashing the check at the bank that issued it – again, my experience was that they didn’t have any consumer branches in the area. And a check cashing place that has a special on refund checks may not offer that rate for the bank check from the refund loan. Also, California law sets a 3% maximum (3.5% without ID) fee for government and payroll checks (many banks will cash them for free) – other checks can legally be as high as 12%. (more info here)